WASHINGTON (AP) — The U.S. economy grew at a surprisingly strong 4.3% annual rate in the third quarter, the most rapid expansion in two years, driven by consumers who continue to spend in the face of ongoing inflation.
U.S. gross domestic product from July through September — the economy’s total output of goods and services — rose from its 3.8% growth rate in the April-June quarter, the Commerce Department said Tuesday in a report delayed by the government shutdown. Economists surveyed by the data firm FactSet forecast growth of just 3% in the period.
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FILE - A person carries a shopping bag in Philadelphia, Wednesday, Dec. 10, 2025. (AP Photo/Matt Rourke, File)
A television on the floor at the New York Stock Exchange in New York, display a news conference with Fed chairman Jerome Powell, Wednesday, Dec. 10, 2025. (AP Photo/Seth Wenig)
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As has been the case for most of this year, the consumer is providing the fuel that is powering the U.S. economy. Consumer spending, which accounts for about 70% of U.S. economic activity, rose to a 3.5% annual pace last quarter. That's up from 2.5% in the April-June period.
A number of economists, however, believe the growth spurt may be short-lived with the extended government shutdown dragging on the economy in the fourth quarter, as well as a growing number of Americans fatigued by stubbornly high inflation.
A survey published by the Conference Board Tuesday showed that consumer confidence slumped close to levels not seen since the U.S. rolled out broad tariffs on its trading partners in April.
“The jump in consumer spending reminds me a lot of last year’s (fourth quarter),” said Stephen Stanley, chief U.S. economist at Santander. “Consumers were stretching. So, as was the case entering this year, households probably need to take a breather soon.”
The seemingly divergent paths between how consumers say they are feeling and how much money continues to be spent may be more evidence of what is known as a a “ K-shaped economy ” In that situation, the income of wealthier Americans is on the rise, due to stock market gains and growing investments, while lower-income households struggle with stagnant pay and higher prices.
“The latest data on household spending indicates continued strong gains in consumer spending, particularly on services,” wrote Michael Pearce, chief U.S. economist for Oxford Economics. “We think that reflects the K-shaped consumer recovery, with spending growth driven by older, wealthier households while those on low and more moderate incomes struggle.”
Tuesday's GDP report also showed that inflation remains higher than the Federal Reserve would like. The Fed’s favored inflation gauge — called the personal consumption expenditures index, or PCE — climbed to a 2.8% annual pace last quarter, up from 2.1% in the second quarter.
Excluding volatile food and energy prices, so-called core PCE inflation was 2.9%, up from 2.6% in the April-June quarter.
Economists say that persistent and potentially worsening inflation could make a January interest rate cut from the Fed less likely, even as central bank official remain concerned about a slowing labor market.
“If the economy keeps producing at this level, then there isn’t as much need to worry about a slowing economy,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management, adding that inflation could return as the greatest threat to the economy.
Another consistent driver in the U.S. economy, spending on artificial intelligence, was also evident in the latest data.
Investment in intellectual property, the category that covers AI, grew 5.4% in the third quarter, following an even bigger jump of 15% in the second quarter. That figure was 6.5% in the first quarter.
Consumption and investment by the government grew by 2.2% in the quarter after contracting 0.1% in the second quarter. The third quarter figure was boosted by increased expenditures at the state and local levels and federal government defense spending.
Private business investment fell 0.3%, led by declines in investment in housing and in nonresidential buildings such as offices and warehouses. However, that decline was much less than the 13.8% slide in the second quarter.
Within the GDP data, a category that measures the economy’s underlying strength grew at a 3% annual rate from July through September, up slightly from 2.9% in the second quarter. This category includes consumer spending and private investment, but excludes volatile items like exports, inventories and government spending.
Exports grew at an 8.8% rate, while imports, which subtract from GDP, fell another 4.7%.
Tuesday’s report is the first of three estimates the government will make of GDP growth for the third quarter of the year.
Outside of the first quarter, when the economy shrank for the first time in three years as companies rushed to import goods ahead of President Donald Trump’s tariff rollout, the U.S. economy has continued to expand at a healthy rate. That’s despite much higher borrowing rates the Fed imposed in 2022 and 2023 in its drive to curb the inflation that surged as the United States bounced back with unexpected strength from the brief but devastating COVID-19 recession of 2020.
Though inflation remains above the Fed’s 2% target, the central bank cut its benchmark lending rate three times in a row to close out 2025, mostly out of concern for a job market that has steadily lost momentum since spring.
Last week, the government reported that the U.S. economy gained a healthy 64,000 jobs in November but lost 105,000 in October. Notably, the unemployment rate rose to 4.6% last month, the highest since 2021.
The country’s labor market has been stuck in a “low hire, low fire” state, economists say, as businesses stand pat due to uncertainty over Trump’s tariffs and the lingering effects of elevated interest rates. Since March, job creation has fallen to an average 35,000 a month, compared to 71,000 in the year ended in March. Fed Chair Jerome Powell has said that he suspects those numbers will be revised even lower.
FILE - A person carries a shopping bag in Philadelphia, Wednesday, Dec. 10, 2025. (AP Photo/Matt Rourke, File)
A television on the floor at the New York Stock Exchange in New York, display a news conference with Fed chairman Jerome Powell, Wednesday, Dec. 10, 2025. (AP Photo/Seth Wenig)
FILE - People shop at the Christmas Village in Philadelphia, in Philadelphia, Wednesday, Dec. 10, 2025. (AP Photo/Matt Rourke, File)
Roofers work atop a house in Anna, Texas, Thursday, Dec. 18, 2025. (AP Photo/LM Otero)
DUBAI, United Arab Emirates (AP) — As the United States assembles its greatest military firepower in decades in the Middle East, Iranians are warily awaiting the next round of talks with the U.S. in Geneva this week — negotiations that many see as a last chance for their ruling theocracy to strike a deal with U.S. President Donald Trump.
Some say the situation feels hopeless. Battered by decades of sanctions, heightened by Trump's 2018 decision to withdraw from Tehran's nuclear deal with world powers, Iranians also just suffered through the bloodiest crackdown on dissent in the country's modern history.
Still, Iran heads into the Thursday talks “with a determination to achieve a fair and equitable deal — in the shortest possible time,” Foreign Minister Abbas Araghchi posted Tuesday on X.
As Iranians await the outcome of the Geneva negotiations, many fear the outbreak of a war that could surpass Iran's bloody 1980s conflict with Iraq.
That conflict sparked a patriotic response from Iranian volunteers. But now the prospects of a war with the U.S. have riven a population that includes hard-line supporters of the theocracy and those who feel Iran is splitting at the seams, especially after it is still reeling from a devastating 12-day war with Israel in June and thousands of people killed and arrested during last month's protests.
Trump said at least 32,000 people were killed in the protests, which is at the further end of estimates over the death toll. The U.S.-based Human Rights Activist News Agency has so far counted more than 7,000 dead and believes the death toll is far higher. Iran’s government offered its only death toll on Jan. 21, saying 3,117 people were killed.
“Every morning when I get up, my brain is full of chaos,” said Sepideh Bafarani, a 29-year-old woman who works in a women's clothing store. “It's a possible war ... and an ongoing bad economic situation.”
Rasool Razzaghi, a 54-year-old resident in the capital, Tehran, shared similar concerns ahead of the talks.
“I predict that if both sides really mean what they are saying, a war will start," he said.
For weeks, Trump has talked about an “armada” now largely in place off the coast of Iran, including the aircraft carrier USS Abraham Lincoln. He has also sent the USS Gerald R. Ford, the world’s largest aircraft carrier, from the Caribbean toward the Mideast.
Overall, at least 16 U.S. Navy ships will be assembled, according to a U.S. Navy official, who spoke on condition of anonymity to detail sensitive military movements.
That’s comparable to Operation Desert Fox in 1998, when American and British forces bombed Iraq for four days over Saddam Hussein ’s refusal to comply with U.N. Security Council resolutions about weapons inspections. There are hundreds of fighter jets and other support aircraft in the region necessary for launching a major attack on Iran.
Adding to that force, the United States also moved 12 F-22 stealth fighter jets to a base in Israel on Tuesday, according to a U.S. official, who also spoke on condition of anonymity to detail sensitive military movements.
Meanwhile, the CIA published instructions in Farsi online on how Iranians can securely contact the spy agency.
Iranians have been watching the buildup with growing concern, some by surreptitiously getting around internet restrictions or watching satellite news channels. Iranian state television has continued showing the country's military running drills and its leaders threatening massive retaliation against any American assault.
Iranian state TV on Tuesday said the country's Revolutionary Guard held a drill that included launching missiles, flying drones and firing guns at targets along its coast, without elaborating on the exact time or place of the exercise.
“It’s not an equal situation," a passerby told The Associated Press on Tuesday in Tehran, declining to give his name for fear of reprisals. "One side has entered the talks with a lot of power, it has lot of equipment. On the other hand, Iran is in a weak position. They want total surrender, but I think that’s not viable.”
Steve Witkoff, the billionaire friend of Trump serving as his special Mideast envoy, has said the president didn’t understand why Iran “hadn’t capitulated” given the forces arrayed against it in the region and beyond in Europe. Iranian Foreign Minister spokesperson Esmail Baghaei dismissed Witkoff’s comments on Monday, saying “the word ‘capitulation’ does not exist in the Iranians’ dictionary.”
In his X posts Tuesday, Araghchi reiterated that Iran had no intention of ever developing a nuclear weapon but said it also would not forgo the “right to harness the dividends of peaceful nuclear technology for our people.”
The Geneva talks, he said, are “a historic opportunity to strike an unprecedented agreement that addresses mutual concerns and achieves mutual interests. A deal is within reach, but only if diplomacy is given priority.”
Iran, he added, would “stop at nothing to guard our sovereignty with courage.”
It remains unclear just what Iran could offer Trump. Tehran has insisted it wants to continue enriching uranium, something Trump has repeatedly said must stop. It also has refused to discuss its ballistic missile arsenal or its support of regional proxy forces, another Trump demand.
It remains difficult to speak to people in Iran; internet and telephone lines remain disrupted following last month's nationwide protests. On the streets of Tehran, many people are suspicious of talking to journalists, assuming reporters work for the government. Iran's theocracy controls all radio and TV stations in the country.
Those who did talk with the AP repeatedly mentioned the 1980s war with Iraq, a cataclysmic event in the minds of those old enough to remember it.
“I remember many bad situations, but even during Iran-Iraq war in 1980s it was not like this," said Hassan Mirzaei, a 68-year-old taxi driver. “I am in shock without any hope — especially when there is word about war.”
He added: “I have two orphaned grandchildren, and I need to work to feed.”
The man in Tehran who spoke of an unequal nature of the talks said: “We once fought Iraq for eight years, but it was a country at the same level with us. Going to war with America, Israel and NATO will have very horrible and unpredictable consequences."
“What can we do,” he added. "We can’t leave our country.”
Ami Mianji, a 33-year-old who runs an auto repair shop, described Iranians as a brave people who aren't afraid of war.
“I do not care about threats by Trump and others; eventually Iranians will push back any warmonger,” Mianji said.
A student who spoke on condition of anonymity for fear of reprisals said, “Iran is refusing to back down from its positions for sure, because if it does, it would have officially given up its 40-year-old ideology."
“I have no hope,” he added. "The leaders of both countries speak often, and none of them is willing to concede to reach a deal. So the likelihood for war is high.”
Associated Press writer Konstantin Toropin in Washington contributed to this report.
Vehicles drive in downtown Tehran, Iran, Tuesday, Feb. 24, 2026. (AP Photo/Vahid Salemi)
People drive their motorbikes in a square in downtown Tehran, Iran, Tuesday, Feb. 24, 2026. (AP Photo/Vahid Salemi)
A woman crosses a square as motorbikes ride past in downtown Tehran, Iran, Tuesday, Feb. 24, 2026. (AP Photo/Vahid Salemi)
People walk across an overpass in downtown Tehran, Iran, Tuesday, Feb. 24, 2026. (AP Photo/Vahid Salemi)
